How To Form A Corporate Entity

John Cereso of the Legal Minute

Forming of a corporation

Get all the facts you should know from Nevada Law Group as a business owner when it comes to forming a corporate entity in the state of Nevada.

There are three types of business entities; the first is the sole proprietorship.  This is essentially every business that has ever been created that doesn’t fall into one of the other two categories’. Whether it’s a lemonade stand or a retail store every business that is formed that isn’t a corporation or partnership is a sole proprietorship.

In a sole proprietorship your business income is passed directly through your tax return and you have no corporation shield for any action taken against the business, which means you can be sued personally for anything your business does, whether it’s not paying a bill or harming someone.

The second type of business entity is a partnership. A partnership, put simply, is a sole proprietor that has two or more people. A dangerous part of a partnership is you are liable for the actions of your partner. The partner will have the ability to obligate you to debts through the business which will then flow down to you personally should the business fold because a partnership does not get a corporate shield or protection. There is also something called a limited partnership where you have a general partner who has un-limited liability and limited partners who don’t really have the kind of liability that a general partner will have.

There are a lot of nuances in the law regarding general partnerships and limited partnerships and you
must be very careful if you select this type of entity. Your business income in a partnership flows through your personal taxes as well in most cases.

The third and last type of entity is a corporation. A corporation under the law is a non-living entity and is treated as an actual person so far as the law is concerned, it is a type of legal fiction. So a corporation, for example, can sue in its own name for its own benefit.

In a corporation you form a board of directors who hire officers. Stockholders of a corporation are limited in their liability to the amount that they have invested. For example, if I purchase one hundred thousand dollars worth of stock in McDonalds the only money I could possibly be liable for is the one hundred thousand dollars that I have put in. If McDonalds is sued for ten million dollars they can’t come to me, the stockholder, to satisfy that judgment.

The negative part of a corporation is that it is double taxed. Corporations are taxed as a corporation meaning they pay corporate income tax, they then distribute profits to you personally and those profits are then taxed on your individual tax return so taxes are paid twice on the same money. This tax reason is one of the reasons why limited liability companies or LLC’s are the most popular entity formed.

The state of Nevada actually forms more companies and LLC’s than any other state in the country. Limited Liability companies or LLC’s provide you with the same level of protection that a regular corporation does. Members of limited liability companies are not personally liable for the debts of the business and they can’t be sued unless they personally commit fraud or gross negligence as part of the business.

LLC’s are generally cheaper and easier to form and maintain.  Most importantly, limited liability companies, just like corporations, have the ability to be taxed as a C Corp or an S Crop. Many clients are confused about what a C Corp and S Corp means to them as a business. A C Corp means you’re being taxed as a corporation and paying corporation income tax and paying double taxation with distributions to you on your personal income tax return.

S Corp’s, on the other hand, are taxed only on your personal income tax return and no corporation income taxes are paid. Whether your are an LLC or a regular corporation, the election of a C Corp or S Corp designation is strictly for tax purposes and has nothing to do with the underlying entity you are forming. Whether it is a corporation or an LLC, they are created to prevent you from being held personally liable.

Should you have any questions about forming a Corporation or LLC or would like to leave comments for John Cereso please refer to our website www.nevadalawgroup.com. Please visit John Cereso Facebook and Twitter to keep up with John Cereso Legal Minute